Should I reallocate/diversify?

[Cool Friend]

Hello, I haven't revised my strategy in a while and wanted to ask a couple questions to see what you think.

I have just one investment account, an employer 401(k) that I have allocated to 80% large cap US stocks, and 20% small/medium cap US stocks, both tracking S&P500.  I also have an emergency fund in a high-yield savings account that is perhaps excessively padded--it's closer to one year expenses than 6 month. Maybe I'm reading too much news, but grumblings about inflation make me wonder if I shouldn't shift some of that cash into different asset classes like an REIT ETF, or international stocks and/or bonds, or emerging markets, or even precious metals? What do you think?

A second, related question--my employer match is 3%, but I've been putting in 10% (the rest of my savings rate was going towards killing a debt, which is done, and building an emergency fund, also done as I explained above). I did this because I liked putting pre-tax dollars to work, and I liked the protection from bankruptcy. Not that I'm presently in danger of going bankrupt, but it makes me feel safe that I won't end up with nothing if something horrible happens.  According to the investment order, I should scale back my 401(k) to 3%, and then shift the money that would have been going towards that to a Roth IRA (I don't think I'm eligible for HSA, but I haven't checked in a while). The expense ratios would be much better in a Vanguard IRA, after all. Should I adjust to stick closer to the Investment Order recommendation?

Thanks!

[simonsez]

Do you have an IPS?  Do you feel it doesn't line up with your long-term goals?  I feel like an allocation that you're comfortable with in the most/all scenarios is important.  If not, then adjust.

As for your investment order, yes if you have high fees in your 401k AND are unable to max out both your 401k and Roth IRA and thus need to prioritize one over the other, you would be wise to have more going to your Roth IRA after having met the 401k employer match requirement.  This ignores taxes, though.  Obviously it's better to max out both your 401k and Roth IRA but not everyone can swing that.

[EvenSteven]

One thing that seems to be all the rage these days is to keep your emergency fund in series I bonds. I'm taking this route myself, and am converting 10K per year of my emergency fund from a CD ladder to I bonds. This should keep your emergency fund protected from inflation and remain very liquid after the one year holding period.

[ChpBstrd]

I think a 100% stock allocation is very reasonable for a person with at least a few years to go before retirement. Your stock allocation will include an REIT component, international exposure, EM exposure, etc. However you might want to broaden more into your plan's mid-cap and small-cap funds to increase diversification.

I suggest following the Investment Order sticky post in general. I'm a big fan of 401(k)s, and max out mine. Next I max out my Roth. The 401k saves me thousands of dollars in taxes each year (paid less than 2% in 2020) and the Roth sets the foundation for my first few years of retirement while shielding dividends and capital gains from taxes.

Re: Grumblings about inflation... I've been hearing grumblings about inflation since 2009, which turned out to be the start of a long-period of inflation coming in below all targets and expectations. The narrative is that Democrats will get into office and tax and spend until the currency is debased, although this forecast did not hold during the Clinton or Obama administrations. Interestingly, we heard very little of this talk during the Trump administration, whose policies were at least as deficit-inducing as Biden's wildest dreams; and these policies such as an infrastructure bill may never even come to fruition. Biden's economic policies are a lot closer to Trump's than the panic machine would have us believe.

Meanwhile, I think it's important to realize that thousands of just-in-time supply chains suddenly went slack with production shutdowns in 2020, only to be yanked tight with a consumption boom in 2021. Yes, the prices for energy, construction materials, cars, etc. will need to rise until production catches up. How could it be any other way? It's a good problem to have because we just dodged a repeat of the Great Depression. But if we are investing for the next 10 years instead of the next 10 months, we'll need to look at the longer-term trends of disinflation, greying demographics, and dollarization of fast-rising emerging economies that have led to inflation in the 2% range for over a decade.

[Cool Friend]

Thanks! I don't have an IPS really--just invest and hold my savings.

I'm not very worried about the inflation, just needed some second opinions on my extra-padded cash savings. I don't make quite enough to max out my 401(k), and presumably the untaxed gains from the IRA would exceed what I would save in taxes, though I should run the numbers to make sure.

[MustacheAndaHalf]

I have just one investment account, an employer 401(k) that I have allocated to 80% large cap US stocks, and 20% small/medium cap US stocks, both tracking S&P500.

The S&P is a large-cap index.  I don't understand how you're investing in small cap stocks "tracking S&P 500".

S&P 1500 is a composite of their large (S&P 500), mid-cap (S&P 400) and small-cap (S&P 600) stocks.  So if you only have S&P 500, you do not have small caps.

[Cool Friend]

I have just one investment account, an employer 401(k) that I have allocated to 80% large cap US stocks, and 20% small/medium cap US stocks, both tracking S&P500.

The S&P is a large-cap index.  I don't understand how you're investing in small cap stocks "tracking S&P 500".

S&P 1500 is a composite of their large (S&P 500), mid-cap (S&P 400) and small-cap (S&P 600) stocks.  So if you only have S&P 500, you do not have small caps.

My bad, it's the S&P400 that are my "Small/Mid US Equity" stocks.

[talltexan]

If you would like to add one asset class, consider Small Cap Value. I've read a lot of material from Paul Merriman and Larry Swedroe about orienting toward Value, and I think it could juice your long-term returns.